UPDATE 2-Europe's spies work together on mass surveillance - Guardian

* Guardian cites documents leaked by Edward Snowden

* Report embarrassing for European critics of NSA

* German agency denies circumventing laws
(Adds German reaction)

By Estelle Shirbon

LONDON, Nov 2 (Reuters) - Spy agencies across Western Europe
are working together on mass surveillance of Internet and phone
traffic comparable to programmes run by their U.S. counterpart
denounced by European governments, Britain's Guardian newspaper
reported on Saturday.

Citing documents leaked by fugitive former U.S. National
Security Agency (NSA) contractor Edward Snowden, the Guardian
said methods included tapping into fibre optic cables and
working covertly with private telecommunications companies.

The Guardian named Germany, France, Spain, Sweden and the
Netherlands as countries where intelligence agencies had been
developing such methods in cooperation with counterparts
including Britain's surveillance agency GCHQ.

The report is potentially embarrassing for governments,
especially in Germany and France which have been the most vocal
in protesting about U.S. mass surveillance of European
communication networks revealed by Snowden since June.

Germany, jointly with Brazil, circulated a draft resolution
to a U.N. General Assembly committee on Friday that called for
an end to excessive electronic surveillance, data collection and
other gross invasions of privacy.

There has been particular anger in Germany, a close ally of
the United States, over the revelation that the NSA monitored
the mobile phone of Chancellor Angela Merkel.

Snowden has written an open letter to Merkel and other
German authorities to say he is counting on international
support to stop Washington's "persecution" of him.

Germany's BND federal intelligence service said there had
been considerations in 2008 about merging German security
services' surveillance of telecommunications, which would have
required changes to telecommunication and security laws.

It said it had exchanged experiences with the British
services on this in 2008 but these discussions had focussed on
technical rather than legal issues. The BND added that it
regularly held such exchanges on technical developments with
other European services.

"It is incorrect that Germany's BND federal intelligence
service tried to circumvent legal restrictions to be able to
implement British acquisition technology. On this point too the
BND complied with the law," a BND spokesman said.

The Guardian said GCHQ files leaked by Snowden showed the
British agency taking credit for advising European counterparts
on how to get around domestic laws intended to restrict their
surveillance powers.

"HUGE TECHNOLOGICAL POTENTIAL"

Citing a 2008 GCHQ country-by-country report, the Guardian
said the British spies were particularly impressed with
Germany's BND agency, which they said had "huge technological
potential and good access to the heart of the Internet".

"We have been assisting the BND ... in making the case for
reform or reinterpretation of the very restrictive interception
legislation in Germany," the GCHQ document said, according to
the Guardian.

The GCHQ had also praised France's DGSE agency and in
particular its close ties with an unnamed telecommunications
company, a relationship from which GCHQ hoped to benefit.

"We have made contact with the DGSE's main industry partner,
who has some innovative approaches to some Internet challenges,
raising the potential for GCHQ to make use of this company in
the protocol development arena," the report said.

There was similar analysis of the intelligence agencies in
Spain, Sweden and the Netherlands, with Spain's CNI praised for
its ties with an unnamed British telecommunications firm and
Sweden's FRA congratulated over a law passed in 2008 that
widened surveillance powers.

Asked about the Guardian's report, Sweden's National Defence
Radio Establishment (FRA) said it was natural that it had
contacts with similar organisations in other countries.

FRA spokesman Fredrik Wallin said cooperation with foreign
intelligence services could include exchanges of intelligence
reports. He declined to comment on specific countries but said
all activities were strictly controlled by Swedish law.

"There is a clear legal framework which determines how we
cooperate with other countries," he said.
(Reporting by Estelle Shirbon; additional reporting by Andreas
Rinke in Berlin; Editing by Mark Heinrich)